The life insurance industry has been mostly stable over the last century or so, as current life insurance statistics show.
Nevertheless (and despite Yogi Berra’s admonition to “never make predictions, especially about the future”), change appears to be gathering on the life insurance industry’s horizon.
Indeed, Top-Gun management consultant firm McKinsey & Company recently released an attention-grabbing report describing The Future of Life Insurance.
Those folks at McKinsey are rumored to be pretty clever, so the life insurance industry has taken notice.
The McKinsey crew notes that revenue within the industry has, in recent years, failed to keep pace with generalized increases in GDP.
Domestic premium growth isn’t what it once was—and consistently low interest rates have dampened returns on the investment-grade bonds and other low-risk investments that insurers favor.
Of course, the stock market has soared, but an insurer exposed to too much risk runs the peril of becoming the next AIG—still trying to fully restore its reputation after being saved from near collapse by a 2008 Federal Reserve rescue mission.
With homegrown premium growth ebbing and returns on safe investments reduced for the foreseeable future, where is a humble life insurance company to turn?
Mining New Markets.
But, in this case, they’re talking about looking to foreign markets for new clients, rather than a new workforce. The report details how, in recent years, over half of life insurance premium growth has been derived from emerging markets.
The U.S. and European markets are still huge, but they’re largely dominated by industry stalwarts who, in some cases, have had more than a century to cement their footprints.
In any event, American and Western European consumers are well-served by a well-established market, while the new middle classes being birthed by developing Asian and Latin American economies present more growth potential.
The top life insurance carriers (including some of the venerable giants) hoping to expand their policyholder headcounts are increasingly searching for new consumers in Asia, in particular. That trend will likely intensify in the future.
An Underwriting Revolution?
Shifts in geographic emphasis are interesting, but where the McKinsey intellectuals’ Harvard degrees really pay dividends is in their discussion of underwriting.
McKinsey predicts—based on recent trends that haven’t yet had the opportunity to fully ripen—what would be a monumental change in the way risk is evaluated in the life insurance industry.
Contemporary Life Insurance Underwriting.
Traditionally, most policies have been fully underwritten life insurance policies.
A prospective applicant completes a written application, provides authorization for the insurer to review medical-history and driving records, and undergoes a medical exam with a blood test.
This gives the insurer ample information to work with when evaluating risk and makes it possible for insurers to fine-tune premium requirements to individual risk level.
Insurers can usually offer better life insurance rates if a policy is fully underwritten. The problem, though, is that the application process takes a long time and undergoing a medical exam can be inconvenient and intrusive.
Online applications help to speed along the process, and they’re commonplace now.
But you can’t really do a medical exam online, and some prospective insureds just don’t want to be poked and prodded by Nurse Betty. So, they don’t apply for coverage that they might genuinely need.
Simplified issue policies limit medical underwriting to just a written questionnaire, and guaranteed acceptance life insurance policies don’t involve any medical underwriting at all.
But they also have some significant drawbacks—at least from the consumer perspective.
First, the premiums are usually higher than what the same policyholder could get with a fully underwritten policy. Because the carrier is proceeding with less health information, it assumes the applicant’s risk level is on the high side.
As a result, premiums increase.
Effectively, you’re purchasing the right to skip the life insurance medical exam.
Guaranteed-acceptance policies are even pricier, and they also come with a waiting period of two years or so until full coverage kicks in.
The other big drawback to simplified issue and guaranteed acceptance is that, with less information to work with, insurers usually have lower age and/or death benefit caps.
In both cases, the objective is to reduce risk exposure if a policy is issued to someone who a medical exam would have disqualified.
Streamlining the Application Process.
Plenty of consumers who might otherwise purchase life insurance don’t buy policies due to the time-consuming application process and the privacy intrusion of medical exams.
This is especially true with young consumers who are accustomed to speedy online transactions.
An insurer that could streamline the underwriting process and eliminate the exam—but still appraise risk well enough to offer competitive premiums—would be positioned to offer the best of both worlds.
In theory, that insurer would pick up a sizeable quantity of young policyholders in the process.
Of course, that’s easier said than done.
You see, medical exams serve a valuable underwriting purpose—providing what insurers have traditionally considered the best means of evaluating an applicant’s current health status.
Because current health is a strong predictor of longevity, medical exams let a carrier more reliably assess the risk level involved with an individual applicant.
Several carriers have tried to split the difference.
Policies are still fully underwritten, and exams are still technically required. But the carrier waives the exam if the written application suggests that the applicant is low risk.
Typically, applicants qualify for an exam waiver if they are young (below 50 or so), don’t smoke, and don’t have any red-flag medical conditions.
However, exam waivers are often unavailable for longer term lengths and higher coverage levels.
New York Life, Lincoln Financial, Banner Life, and Protective are among the insurers that have adopted this type of approach.
Replacing a Medical Exam with Analytics and AI
A few innovative companies are trying to do away with medical exams not by underwriting with less information, but by underwriting with alternative information and algorithmic analysis.
The idea is to use individual information provided by applicants—evaluated via advanced analytics and artificial intelligence—as a stand-in for vital stats and bloodwork.
If it works as planned, the carrier gets a mortality assessment at least as reliable as what is available through full underwriting with a medical exam.
The goal of algorithmic underwriting where it’s been implemented is to find ideal customers without actually administering an exam.
The insurer identifies factors that reliably correlate with low mortality and asks for that information on the application.
Once vetted, low-risk insureds get the benefit of skipping the medical exam and, in some cases, even lower premiums.
As more policies are issued and more data become available, the insurer can refine the variables, leading to improved accuracy. Improved accuracy leads to pricing refinements.
And lower premiums for optimal insureds attract additional young, healthy customers.
That, in turn, increases the pool of available data. It’s a positive feedback loop.
At this point, a big weakness is that not every insurable applicant is an ideal candidate.
Insurers need a means of setting premiums for moderate-risk insureds if they are going to forego medical exams and still serve a significant segment of the public.
The analytics-based approach to underwriting is currently being tried out by a few well-funded start-ups operating as online agencies for established insureds.
Ethos and Bestow offer competitively priced no-exam policies underwritten by Banner Life and North American Life, respectively.
Health IQ is authorized by some of its carriers (SBLI, Ameritas, Assurity, and Protective) to offer discounted rates for no-exam coverage to applicants identified as particularly low-risk by the company’s proprietary software.
Health IQ’s application process involves a detailed health and wellness survey intended to measure key factors affecting longevity—like exercise and dietary habits—along with an applicant’s overall health consciousness.
The fundamental business plan is to attract insureds with healthy lifestyles and the corresponding low mortality risk. Health IQ then “rewards” them with exceptionally low premiums.
Health IQ has already amassed and analyzed massive amounts of lifestyle and life-expectancy data, identifying factors that correlate with long life expectancy and low mortality risk. According to Health IQ, its unique process out-performs traditional underwriting in predicting longevity.
Whereas Health IQ’s application process is somewhat time-consuming, Ethos Life emphasizes its fast, minimal-effort-required application. The Ethos website asks applicants to provide fairly normal underwriting information—BMI, personal and family medical history, financial and lifestyle questions, etc.
The information is then analyzed by Ethos’ proprietary predictive algorithm, allowing qualifying insureds to obtain straight-forward term coverage within a few minutes, with no medical exam needed.
Ethos’s objective is to let relatively young, healthy insureds obtain term coverage priced like it’s fully underwritten but without an exam. Applicants who are older, have health issues, or want especially high coverage can still get life insurance from Ethos, but they might have to take a medical exam.
Basically, Ethos can find insureds below a certain risk threshold where medical exams become superfluous. Over that threshold, though, the insurer (i.e., L&G American affiliate, Banner Life) still wants hard medical data.
Bestow is similar to Ethos with an application that asks around 20 questions relating to health status, lifestyle and activities, and medical history. Then, the company’s proprietary software evaluates the answers alongside prescription and credit reports, DMV records, and previous insurance applications.
Bestow claims its process is as reliable for underwriting as a conventional medical exam. However, Bestow doesn’t issue policies to insureds over 55 years old, won’t issue a term policy longer than 20 years, and doesn’t let policyholders renew coverage when their initial terms expire.
So, like Health IQ and Ethos, Bestow is geared toward young, healthy applicants, but the company isn’t ready to rely on purely data-driven underwriting for insureds who might present a mortality risk that isn’t below average.
Where is the Life Insurance Industry Headed?
Ancient Chinese philosopher Lao Tzu tells us, “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” That may be so, but McKinsey has some interesting ideas about where the life insurance industry will be moving in the future.
Proceeding from the current cutting edge of accelerated, AI-oriented underwriting, which “dramatically reduces the need for invasive fluid and paramedical exams and results in near auto-issuance for the majority of policies,”
McKinsey anticipates that the industry will move toward “microsegmentation.”
Microsegmentation entails increased personalization of policies and collection and analysis of even more information.
External data obtained from, for example, pollution sensors will allow insurers to increasingly consider how environmental factors impact insureds’ health.
Microsegmentation is a bridge to the ultimate destination— “one-touch underwriting.”
At that stage, insurers play a much more active role in their customers’ lives after a policy is issued.
Relying on real-time “environment, health, and lifestyle” updates from insureds’ mobile devices, carriers can continuously evaluate an insured’s mortality risk, updating premiums as more information becomes available and is algorithmically analyzed.
In turn, the insurance company’s app regularly provides customized tips, suggestions, and reminders designed to help the insured stay healthy.
The theory is that the insurance company and policyholder both benefit if the insured maintains a healthier lifestyle.
The former is less likely to pay out a death benefit for a healthy insured, and the latter gains the general benefits of being healthy (and not dying).
In their report, McKinsey calls this model “shared-value economics.” It’s designed to create “an engaged wellness ecosystem.”
Hopefully, insurance companies who adopt this approach in the future (and their no-doubt massive marketing budgets) will generate some more graceful terminology.
McKinsey believes that consumers will be eager to provide a constant stream of personal health and lifestyle information in exchange for workout and diet notifications.
However, those services are already easily and cheaply accessible from other sources.
So, the incentive on the insured’s side needs to come in the form of potentially reduced premiums—positive reinforcement for good behavior.
McKinsey reports that the “dynamic…pay as you live” premium model is already catching on in Japan.
While it does seem to offer some advantages to consumers, it also has noteworthy drawbacks.
Although in the social-media era personal privacy has been somewhat deemphasized as a societal value, there are bound to be more than a few consumers who reject the idea of providing a constant stream of personal information to a life insurance company.
McKinsey estimates that sixty percent of insureds will be “comfortable sharing personal details with their insurer in exchange for lower premiums.” That means forty percent won’t be.
Another issue is that fixed premiums provide a real benefit.
If you buy a 20-year level term policy and, after a few years, develop a health issue that makes you more risky to insure, you can still keep the policy without facing a premium increase.
“Dynamic pricing” incentivizes healthy living with reduced premiums, but it would presumably also have the potential for higher premiums, too, if an insured’s mortality risk goes up.
Like with accelerated underwriting, young and healthy insureds are likely to see advantages that aren’t available to less-than-ideal insureds.
Genetic testing has the potential to be a game-changer in future underwriting, but it also presents potential ethical dilemmas.
Setting aside the question as to whether consumers will be comfortable providing a map of their entire DNA structure to an insurance company, insurers will have to decide whether it is ethical to penalize or reward consumers for “good” or “bad” genes outside of their control and which might not have any outward manifestation.
And the risk of disparate-impact discrimination would likely be significant, as members of certain groups would inevitably be more or less likely to have genes linked to life expectancy.
Like many other industries, the life insurance industry of the future will, in all probability, be impacted by increased automation.
For consumers, this could mean a simplified process for making policy changes and access to more flexible financial products.
The McKinsey report references a move toward health and life hybrid policies in other jurisdictions.
Regulatory changes would likely be needed to make those types of policies workable in the U.S.
But it’s easy to envision considerable demand for something like that in the American market.
And the “dynamic pricing” model might be more palatable to consumers if health insurance is part of the package.
Consumers might benefit from reductions in insurers’ overhead costs derived from increased automation.
Reduced costs might translate into lower premiums or higher dividend payments.
Or, life insurers could put the savings toward other initiatives or executive compensation—or some combination.
Though automation is often associated with job losses, McKinsey believes automation will actually lead to a net increase in jobs within the life insurance industry.
It will be interesting to see whether this prediction proves correct, though, at the very least, it seems counter-intuitive.